Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

Course 16 – Cost Estimating, Job-Order Costing, and Activity-Based Costing

Intended learning outcomes: Produce a review on costs, cost elements, and cost structures. Explain cost estimating in detail. Describe job-order costing. Disclose activity-based costing.


Figure 16.0.0.1 shows the reference model for business processes, and planning & control tasks, from Figure 5.1.4.2, and highlights the tasks and processes that we will examine in this chapter. Section 5.1.2 provided an overview of the topic discussed here.

Fig. 16.0.0.1       The parts of the system discussed in this chapter (shown on darker background).

Information on costs and pricing is vital to improve managerial decision-making in the area of sales and marketing: What is the cost of goods manufactured? How large is the profit resulting from an order, or, at the least, what fixed costs contribution margin does the order generate? How will varying the consumption of resources affect the costs of individual products or the total costs for the organization?

This chapter does not aim to provide an overview of financial and cost accounting, nor does it provide a detailed presentation of the various financing, costing, and cost accounting methods. See here, amongst others, [KeBu93], [Habe08]. However, since all cost object accounting, and thus also product and project costing, is based on the planning & control system or more precisely on master data or order data — the chapter will address the issue of how administrative logistics manages and determines the various elements needed to calculate the cost of goods manufactured.

Job-order costing identifies and accumulates all the costs generated by an order.

Job-order costing on an ongoing basis allows comparing the costs incurred during production or procurement against target, or estimated costs. Feedback, or data flow from the shop floor data collection system, immediately signals any variances from these standards. Retrospec­tive cost accounting systems generally have the disadvantage that they are applied too long after the actual events, when it is often impossible to identify the causes of the variances.

Cost estimating for a product or order identifies and accumulates all the costs likely to be incurred when manufacturing a batch.

As the most detailed master data are captured in the ERP system, it is possible to perform a simulation of the orders. So it is easy to perform preliminary calculations in advance for any variations in bills of material, routing sheets, or cost elements.

One of the major problems in identifying and accumulating costs is how to assign fixed costs, or overhead costs, to cost objects. Conventional cost systems assign these costs in relation to the number of product units manufactured, using, for example, direct-labor hours or direct material costs as a basis to assign production overhead. Activity-based costing, or activity-based cost accounting (ABC), is an instrument that focuses on the fixed costs (overhead) of repetitive processes. It is a more accurate costing method, for it traces expense categories to the particular cost object, making “indirect” costs “direct.” ABC is based on management of the highly detailed master data in the planning & control system. The chapter will provide a detailed example to show what introducing ABC as a costing method entails.



Course sections and their intended learning outcomes

  • Course 16 – Cost Estimating, Job-Order Costing, and Activity-Based Costing

    Intended learning outcomes: Produce a review on costs, cost elements, and cost structures. Explain cost estimating in detail. Describe job-order costing. Disclose activity-based costing.

  • 16.1 Costs, Cost Elements, and Cost Structures

    Intended learning outcomes: Produce an overview on actual, direct, and overhead costs. Differentiate between average costs and standard costs as well as between variable costs and fixed costs. Explain the cost accumulation breakdown that is the cost breakdown structure of a product.

  • 16.2 Cost Estimating

    Intended learning outcomes: Present an algorithm for cost estimation of goods manufactured. Produce a representation of the cost accumulation and an overview of the comprehensive calculation for a product line.

  • 16.3 Job-Order Costing

    Intended learning outcomes: Describe actual quantities and actual costs. Explain cost analysis. Produce an overview on the interface from order management to cost accounting.

  • 16.4 Activity-Based Costing

    Intended learning outcomes: Disclose the limits of traditional product costing. Explain activity-based costing: aim, basic premise, requirements, and technique. Present typical processes (activities) and process variables as well as the activity-based product cost estimation.

  • 16.5 Summary

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